Ashok S Vakharia HUF Vs ITO (ITAT Mumbai)
The issue under consideration is whether the CIT(A) is correct in confirming addition u/s 69C of the Act on account of unexplained purchases made during the year, calculated on the basis of peak credit?
In the present case, as noted above, the assessee was a trader of fabrics. The A.O. found three entities who were indulging in bogus billing activities. A.O. found that the purchases made by the assessee from these entities were bogus. This being a finding of fact, we have proceeded on such basis. Despite this, the question arises whether the Revenue is correct in contending that the entire purchase amount should be added by way of assessee’s additional income or the assessee is correct in contending that such logic cannot be applied. The finding of the CIT(A) and the Tribunal would suggest that the department had not disputed the assessee’s sales. There was no discrepancy between the purchases shown by the assessee and the sales declared. That being the position, the Tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sales in case of a trader. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases.
ITAT states that, there could be no sale without actual purchase of material keeping in view the fact that the assessee was a trader. The books of accounts were subjected to Tax Audit which contained quantitative details of the items being dealt with by the assessee. The assessee was in possession of primary purchase documents. The payment to the suppliers was through banking channels and the assessee had furnished details of corresponding sales made against the impugned purchases. The sales turnover reflected by the assessee was not disturbed by the revenue. Notices issued u/s 133(6) remained un-responded to in all the cases. Therefore, in such a situation, the addition, which could be made, was to account for profit element embedded in these purchase transactions to factorize for profit earned by assessee against possible purchase of material in the grey market and undue benefit of VAT against such bogus purchases, which lower authorities has rightly done so. However, keeping in view the fact that the assessee was a trader and dealing in low-margin item like metal, which bears a lower VAT rate and also in view of the fact that the assessee had already reflected Gross Profit Rate of 1.71%, the estimation on peak basis as made by learned first appellate authority was on the higher side. ITAT estimate the same @2% of alleged bogus purchases. The balance additions stand deleted.
FULL TEXT OF THE ITAT JUDGEMENT
1. The assessee is under appeal for Assessment Years [AY] 2009-10 to 2012-13 whereas the revenue has filed cross-appeals for AYs 2009-10 & 2011-12. The order of learned first appellate authority for AYs 2009-10, 2011-12 & 2012-13 is common order which has been passed on 20/02/2018 whereas the order for AY 2010-11 has been passed on 12/03/2015. Since common issues were involved, the appeals were consolidated and heard together and now being disposed-off by way of this common order for the sake of convenience & brevity. The assessee has filed additional grounds of appeals for AYs 2009-10 to 2012-13 which contest validity of reassessment proceedings. The same being merely legal grounds and do not require appreciation of new facts and hence, taken on record as per the ratio of decision of Hon’ble Supreme Court rendered in National Thermal Power Co. Ltd. V/s CIT [229 ITR 383]. First, we take up cross-appeals for AY 2009-10.
Cross-Appeals for AY 2009-10
2.1 The assessee’s grounds of appeal as well as additional grounds of appeal would read as under: –
1. On the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Appeal) erred in confirming addition of Rs.7620833/- under Section 69C of the Act on account of unexplained purchases made during the year, calculated on the basis of peak credit.
2. On the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Appeal) erred in not deleting observation made by Assessing Officer that payment received by purchase parties are returned to the applicant in cash after deducting small commission.
3. On the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Appeals) failed to appreciate that
(a) Proceeding initiated under section 147 /148 of the Act is on the basis of reason to suspect and not on reason to believe.
(b) There is no new tangible material in possession of the Assessing Officer which justify issuance of notice u/s 148 of the Act
(c) The initiation of proceeding under section 147 of the Act and issuance of notice under section 148 is bad in law and contrary to the provisions of the Act and liable to be cancelled / annulled.
4. On the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Appeals) erred in confirming order made under section 143(3) rws 147 of the Act by the learned Assessing Officer which is illegal, bad-in-law, ultra vires and without allowing reasonable opportunity of the hearing, without appreciating the facts, submission and evidences in their proper perspective, without providing copies of material used against the appellant and without providing cross examination of parties whose statement are relied upon is liable to be annulled.
5. On the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Appeals) erred in confirming charging of interest under section 234A, 234B, 234C and 234D of the Act.
6. Because in any view, the assessment framed u/s 143(3) r.w.s. 147 of the Income Tax Act, 1961 is without jurisdiction, void ab-initio as the assessee challenges the validity of the assessment order on the ground that the ITO who had passed the order did not have the authority of law to act as the A.O. and to pass the impugned assessment order.
7. Because in any view, the A.O. has to record reasons showing due application of mind before taking recourse to reassessment proceedings, A.O. having initiated reassessment proceedings simply on the basis of information received from DGIT (Inv.) Mumbai without incorporating any corroborative material and his own satisfaction that income has escaped assessment, issuance of notice u/s 148 was not valid.
The grounds raised by the revenue read as under: –
1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing to make a disallowance @12.5% of the impugned purchases ignoring the fact that Hawala parities are non-existent at the given address and further they have given affidavits before the Sales Tax Authorities about their bogus activities of issuing purchase bills without supplying any goods.
2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to see that the decision of the Hon’ble High Court in the case of N.K.Proteins Ltd. V/s DCIT, holding that addition cannot be restricted to certain percentage when entire transaction is bogus, had become final with dismissal of assessee’s SLP & is squarely
2.2 Facts in brief are that the assessee being resident HUF stated to be engaged in the business of trading in ferrous / non-ferrous metals under proprietorship concern namely M/s Rikita Metals, was assessed for impugned AY u/s. 143(3) r.w.s. 147 on 26/02/2014 wherein income of the assessee was determined at Rs.248.11 Lacs after sole addition of alleged bogus purchases u/s 69C for Rs.246.79 Lacs as against returned income of Rs.1 .31 Lacs filed by the assessee on 25/09/2009 which was processed u/s.1 43(1).
2.3 Pursuant to receipt of certain information from DGIT(Investigation), Mumbai/Sales tax Department, Govt. of Maharashtra, it transpired that the assessee obtained bogus accommodation entries of purchases amounting to Rs. 246.79 Lacs from 5 suspicious parties. The details of the suppliers along with amount of respective purchases have already been extracted at para-4.1 of the quantum assessment order. Accordingly, as per due process of law, re-assessment proceedings were initiated against the assessee u/s 147 by issuance of notice u/s 148 on 25/03/2013 which was duly served upon the assessee. The assessee demanded copy of reasons recorded for re-opening which were supplied in due course. The statutory notices u/s 142(1) and 143(2) were issued in due course of assessment proceedings wherein the assessee, inter-alia, was directed to substantiate the purchase transactions. The assessee reflected Gross Profit of 1.71 % on turnover of Rs.274.62 Lacs.
2.4 Upon perusal of inquiries conducted by Sales Tax Department, Maharashtra, it transpired that these dealers were merely issuing bills without delivering any goods and the payment received by these parties were returned to the assessee in cash after deducting small commission.
2.5 To confirm the purchase transactions, notices u/s 133(6) were issued to all the 5 parties, however the same were returned back unserved in all the cases by postal authorities with the remarks “not known / unclaimed”. The assessee was asked to provide the whereabouts of the parties or to produce them for verification of purchases. However, the assessee failed to do so but produced ledger of the parties, in support of the purchases.
2.6 The aforesaid factual matrix led the Ld. AO to treat the stated purchases as unexplained expenditure u/s 69C and accordingly, the same were added to the income of the assessee.
3.1 Aggrieved the assessee agitated the stand of Ld. AO before learned CIT(A) with partial success vide impugned order dated 20/02/2018 which is common order for AYs 2009-10, 2011-12 & 2012-13. The assessee also challenged the validity of reassessment proceedings, however, the same could not find favor with learned CIT(A) in view the decision of Hon’ble Apex Court rendered in ACIT V/s Rajesh Jhaveri Stock Brokers Pvt. Ltd. since the only condition to trigger reassessment proceedings, on factual matrix, was the formation of belief that certain income escaped in the hands of the assessee. Reliance was also placed, inter-alia, on the decision of Hon’ble Bombay High Court in Nikunj Eximp Enterprises Pvt. Ltd. V/s CIT [WP No.2860 of 2012] while rejecting the legal grounds raised by the assessee.
3.2 The assessee, on merits, submitted that it had furnished all supporting material such as copies of purchase invoice, bank statements reflecting payment made to the suppliers through banking channels, corresponding sales invoices and therefore, the additions were made in a summary manner merely by relying upon the information received from Sales Tax Department, Maharashtra and relying upon depositions made by the suspected sellers in their affidavits filed during the sales tax proceedings that they have not made any sales during the year under consideration. It was also pleaded that the copies of information / documents received from VAT department which were used against the assessee were neither provided to the assessee nor any opportunity of cross examining the said suppliers was ever provided to the assessee which was in violation of principle of natural justice. The said submissions were duly considered in the appellate proceedings.
3.3 During appellate proceedings, keeping in view the submissions made by the assessee, the assessee was directed to produce the documents submitted before Ld. AO in support of the transactions along with proof of delivery of goods by the dealers to the assessee along with the details of incidental expenses incurred on those transactions. However, the assessee could not produce any such details.
3.4 In the above background, learned CIT(A), after considering the provisions of Section 114 of Indian Evidence Act held that the order / findings of Sales Tax Authorities could be relied upon by learned AO and the initial burden was on assessee to prove that the stated purchases were genuine. It was also concluded that the incriminating material / evidences were of collateral in nature and the additions were not made solely on the basis of material gathered by Sales Tax Authorities, Maharashtra rather the fact of accommodation entries was duly confronted to the assessee and the assessee was provided with ample opportunities to rebut the allegations levelled by Ld. AO. Reliance was placed on the judgement of Hon’ble Apex Court rendered in Kanungo & Co. V/s Collector of Customs 1983 ELT 1486 SC as noted by Mumbai Tribunal in the case of GLT Industries Ltd. V/s ACIT [65 ITD 380], to arrive at such a conclusion. It was also concluded, at para 8.3.13 of the impugned order, that the principles of natural justice could not be used to the advantage of the persons with a view to defeat the very purpose of justice as held in Hon’ble Apex Court in Chairman, Board of Mining Examination V/s Ramjee [AIR 1977 SCC 965] & Kishanlal Agarwal V/s Collector of Customes [AIR 1967 Cal 80]. Therefore, it was concluded that the plea of cross-examination was not only misleading but a concerted effort to protract the litigation to infinity since the assessee was fully aware of the facts that the parties in question were not only bogus entities but untraceable also. Further, the plea of cross- examination was never raised by the assessee during assessment proceedings. In the above background, it was concluded that the plea was not bona-fide and there was no violation of principle of natural justice as alleged by the assessee.
3.5 In the background of decision of Hon’ble Apex Court in CIT V/s P. Mohankala & Ors. [291 ITR 278] and also the decision of Hon’ble Bombay High Court in Naresh K. Pahuja V/s ITAT [375 ITR 526], it was held that payments through banking channel, simpliciter, would not establish the genuineness of the transactions and the primary onus casted upon assessee to prove the genuineness of the transactions remained undischarged. The strength was also drawn from the decision of Hon’ble Supreme Court in CIT vs. Durgaprasad More (82 ITR 540) to arrive at a conclusion that the transactions could not be considered as genuine.
3.6 Coming to the merits of the case, it was noted that similar additions, on peak credit basis, were made by Ld. AO for AY 2010-11 which was approved by first appellate authority and therefore, facts being the same, the addition in impugned AY were to be made on the same basis. Finally, the additions were confirmed partially by observing as under: –
8.3.23 It observed that for AY 2010-11, the AO has made an addition by applying peak credit, and the appeal filed by the appellant against the addition made has been dismissed by the CIT (A). There is no change in the facts of the case vis-a-vis AY 2010- 11. The Hon’ble ITAT, Ahmedabad ‘C’ Bench has upheld addition made on the basis of peak credit in the case of Vijay Proteins Ltd. Vs. Assistant Commissioner of Income Tax(1 996) 58 ITD 0428 affirmed by the Hon’ble High Court of Gujarat in the case of Vijay Proteins Ltd. v.CIT in ITR No. 139 of 1996 dated 09/12/2014 [ Petitions for Special Leave to Appeal (C) No(S). 8956/2015 dismissed on 06/04/20 1 5J. Hence, it would be appropriate to apply the same principle for the relevant AYs under consideration. It can be observed from the facts recorded in this case, that the goods in question were really received because without receiving such goods the corresponding sales would not have been possible. However, the goods were not received from the parties from whom it is shown to have been purchased but such goods were purchased from different sources which were exclusively within the knowledge of assessee and none else. The invoices produced in support of such purchases were not genuine invoices and entries in relation to such purchase made in the books of accounts are fictitious. But the appellant has not admitted the fact of the bogus purchase invoices. Unless the appellant admits the fact that the payments shown as made by cheques to the bogus suppliers are not genuine, and also that money paid to them when it was withdrawn from the bank was available for making cash purchases, the appellant cannot be allowed credit for cash purchase on the basis of payments recorded in the books of accounts. It is thus concluded that the appellant has paid for such purchases on the date of receipt of material and the source of purchase on the date of receipt is unexplained. However, payment made available for the first purchase can be considered as available for next purchase and peak amount can be worked out to determine unexplained investment in relation to purchase of diamonds from undisclosed parties and undisclosed sources. The AR has computed the peak credit for AY 2009-10 at Rs. 76,20,833/-, for AY 2011-12 at Rs.1 ,44,32,287/- & for 201 2-13 at Rs.77.92.001/-. The AO is directed to verify the peak credit computed by the appellant and restrict the addition to the extent of peak credit after allowing credit for addition made on the basis of peak credit in the immediately preceding year. No addition on account of peak credit would be warranted for AY 2012-13 as the peak credit for the AY at Rs. 77.92.001/- is less than the peak credit for AY 2011-12 at Rs. 1,44,32,287/-.
8.3.24 Further, the motive behind obtaining bogus bills is inflation of purchase price so as to suppress the profits. The profit from such transactions varies with nature of business and no uniform yardstick can be adopted for estimation of such profit. 8.3.25 The estimations of profit embedded in accommodation entries of bogus purchases transactions @ 12.5% out of purchase price accounted through bogus invoices have been upheld as the fair profit rate out of the bogus purchases by the Hon’ble Courts and Tribunals.
8.3.26 In the case of CIT v. Simit P Sheth (2013) 356 ITR 451 (Guj)(HC), the Hon’ble High Court has upheld disallowance @12.5% of such purchases.
8.3.27 The appellant company is a trader in goods i.e. dealers in ferrous and non ferrous metals and under identical facts, the Hon’ble ITAT, Bombay Tribunal (H) has upheld disallowance @12.5% of such purchases in the decision date 4th April, 2017 in the case of Ratnagiri Stainless Pvt. Ltd. vs. Income Tax Officer in ITA No. 4463/Mum/2016 as well as in Income Tax Officer 5 (3) (1) vs. M/s RBS Copper Products Pvt. Ltd. in ITA Nos. 1057 & 1058 dated 04/07/2017.
8.3.28 Thus taking into account the entirety of the facts, the profit embedded in accommodation entries of purchase of diamonds is estimated @ 12.5% of the purchase amount as under:
